Return Trends At Veson Holdings (HKG:1399) Aren't Appealing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Veson Holdings (HKG:1399), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Veson Holdings is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.06 = CN¥84m ÷ (CN¥5.0b - CN¥3.6b) (Based on the trailing twelve months to December 2022).

Therefore, Veson Holdings has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.0%.

View our latest analysis for Veson Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Veson Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Veson Holdings

What Does the ROCE Trend For Veson Holdings Tell Us?

The returns on capital haven't changed much for Veson Holdings in recent years. The company has employed 47% more capital in the last five years, and the returns on that capital have remained stable at 6.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Veson Holdings' current liabilities are still rather high at 72% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, Veson Holdings has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 2.0% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 5 warning signs for Veson Holdings (2 are concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.